Some of the companies doing well in the public markets these days are the very businesses whose software we use at Barrel.
What if, instead of just paying these companies for their software, we had invested that same amount into their stock? What would that be worth in today’s dollars?
For this experiment, I pegged the “investment date” to the day we started paying for the software. For companies that were not listed publicly when we started using them, I pegged the investment date to their initial public offering (IPO) date.
For the “investment amount”, I looked back to find what we had paid (or roughly guessed, if I couldn’t find) for that first year of subscription fees. I rounded the numbers to make things look prettier.
I picked companies that are currently listed publicly and whose software we use regularly at Barrel. There are numerous companies whose products we use that may never be listed publicly or take a while to IPO (e.g. Basecamp, Lattice, Harvest, Webflow, Figma, Pantheon, Greenhouse, etc.). If this exercise has taught me anything, it’s that our business relies heavily on 3rd party software and that most of these are very, very sticky.
- Adobe: We’ve used Adobe software since the very early days of Barrel for various design tasks. However, one thing I’m seeing is that we’re using less and less of the full Creative Cloud suite than we used to as our designers have embraced other tools like Sketch, Figma, Webflow, and Invision. Photoshop still gets regular use and we’ve become dependent on Adobe Sign but surely we can find much cheaper replacements for these at some point? (note how DocuSign isn’t on this list as a result)
- Zoom: We switched over to Zoom from the free UberConference as we required better reliability and stronger video conferencing capabilities. The company had its IPO a bit later. I ended up picked up some shares when that happened.
- Slack: We were late to the Slack group chat game since it was only until Atlassian’s Hipchat was sunset that we fully moved over. This was in August 2018. There was a lot of hype regarding Slack’s IPO because so many cool and hip companies were using them. I picked up some shares initially but actually sold out of it to harvest some tax losses and because it looked like Microsoft Teams was really taking a big bite out of the enterprise market for group chats.
- Smartsheets: We’ve been using Smartsheets as an integral part of our project management process since November 2018, relying on it for building project schedules and for resourcing our team members.
- Microsoft: We’ve always used MS Office but made the switch to their SaaS offering in 2017. We’ve also paid for LinkedIn’s various services (LinkedIn Premium accounts and job postings). As often as we use G Suite tools for documents, presentations, and spreadsheets these days, I don’t think we’ll fully get rid of Office’s grasp on documents.
- Bill.com: We’ve used Bill.com to manage invoicing and payables since October 2016. What makes Bill.com sticky is that if our clients have Bill.com, it’s super easy for them to make payments because we’re quickly in each others’ systems with verified payment info. Since implementing Bill.com, we’ve found it increasingly easier to manage account receivables.
- Cloudflare: We often recommend Cloudflare to our clients for content delivery network (CDN) services in order to speed up websites and protect from denial of service attacks. I also picked some shares of Cloudflare last year along with Slack and Zoom when it IPO’d.
- Atlassian: Atlassian’s JIRA is a very key tool in how we run our web development projects at Barrel. We use it to track various tickets and roadmaps across dozens of projects. Our core team, contractors, and clients all collaborate on JIRA every day. It’s been a very sticky product that’s managed to evolve in design and functionality over the years as well.
So how did this hypothetical Barrel Work Tools Portfolio perform?
The initial “investment” was $47,340 spread unevenly across 8 different companies. Of the 8, 4 of these investments were bought at their IPO price. For the purposes of this experiment, we’ll assume that we were able to buy partial shares. The current value of these are as of May 8, 2020.
Let’s have a look:
Not too shabby! Our $47,340 that we mirrored on 1 year of software costs would be worth over $156k today, an over 3.3X gain (or over 230%) on the initial investment.
Diving in, we can see that the lion’s share of gains (over 90%) came from Adobe, Atlassian, and Smartsheets because A) we had their stocks for longer and B) the investments amounts were larger than the others.
Let’s compare this to a hypothetical S&P 500 portfolio if we were to have bought an ETF like SPY for the same amounts on the same dates:
A 23% gain on the initial investment with the same top 3 investment amounts driving 96% of the gains. Not a terrible outcome, but also made worse because some of these investments came relatively recently when the S&P was reaching all-time highs right before COVID-19 came. Could also be a lot worse if the market hadn’t made such a strong comeback in recent weeks.
Overall, the Barrel Work Tools Portfolio outperformed the S&P 500 by 10X if you compare the unrealized gains ($109,226 vs. $10,907). I suspect that in 3-5 years, this gap could potentially widen if these companies continue to retain customers and expand their offering.
At various times in the past, I would joke to my Barrel partners about investing some of our profits into the companies whose software we used. Of course, we had other investment priorities like hiring new talent, expanding our office space (hurts to think about in the COVID-19 era), getting additional training, and building out tools and frameworks to use on client projects. Those decisions may be harder to quantify, but I’m certain some have been well worth it.
But what this experiment tells me is that we ought to seriously consider investing in businesses whose products we are intimately familiar with and whose brand we can speak to with relative knowledge and confidence. I think Atlassian is a good example of a company whose strong characteristics were known to us all this time. We had front row seats to seeing the growing adoption of their products across peer agencies and clients. We saw them improving their product and rolling out new updates at a steady clip. We also felt them wield their pricing power and bundling abilities, a sign of their stickiness and moat-like qualities. And yet, I was too busy focusing on FAANG stocks, reading commentary on TSLA, and wondering when Airbnb and Stripe would IPO.
I’m not saying that it’s necessary to become an investor in every company whose products we pay for, but perhaps it’s not a bad place to start looking for investment ideas and to slowly expand our circle of competence that can guide future bets. The daily usage, the familiarity with how and why the products are important to customers, the exposure to competitors and alternatives in the market, and the relationship dynamic with the company over long periods of time can provide valuable insights not readily available in financial statements.
For now, I personally own shares in 5 of the 8 companies in the portfolio, some added much later than when we started using the products. I’ll use this experience as a reminder to be more observant of the companies we come in contact with as we consider different software needs.
Bonus: The Shopify Investment
Between March 2011 and May 2015, we made $3,527.36 via referral commissions from Shopify. Shopify, a leading ecommerce platform, paid out an on-going 20% monthly referral for customers we brought on to their platform. So, if a client of ours ended up paying $29/month, we would get $5.80 each month for as long as the client stayed on Shopify.
In May 2015, Shopify had its IPO. I didn’t even pay attention to their IPO at the time. But since we’re playing the what if game here, let’s pretend we had stashed away the $3,527.36 from Shopify and put it into their IPO. It would have been as if Shopify had paid us to own a piece of Shopify. What would it be worth today?
- $SHOP IPO Price (5/22/2020): $28.31
- Purchase Amount: $3,527.36
- Shares: 124.6
- Price as of 5/8/2020: $708.97
- Value as of 5/8/2020: $88,336.01
- Total Gain: +$84,808.65
Four years’ worth of commissions multiplied 25 times in just 5 years. A really nice run.
I don’t find these exercises all that painful or inducing any regrets. In fact, it makes me hopeful that the future holds similar possibilities, and if I can act a bit bolder and quicker the next time around, perhaps there’s a 25-bagger waiting to be had.